Western Digital 2009 Annual Report Download - page 67

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The following table illustrates the computation of basic and diluted income per common share (in millions, except
per share data):
July 3,
2009
June 27,
2008
June 29,
2007
Years Ended
Net income ............................................. $470 $867 $564
Weighted average shares outstanding:
Basic ................................................ 222 221 219
Employee stock options and other ............................ 4 5 7
Diluted............................................... 226 226 226
Income per common share:
Basic ................................................ $2.12 $3.92 $2.57
Diluted............................................... $2.08 $3.84 $2.50
Anti-dilutive common share equivalents excluded* .................. 6 1 2
* For purposes of computing diluted income per common share, common share equivalents with an exercise price that
exceeded the average fair market value of common stock for the period are considered anti-dilutive and have been
excluded from the calculation.
Stock-Based Compensation
The Company accounts for all stock-based compensation in accordance with the fair value recognition provisions in
SFAS No. 123(R). Under the fair value recognition provisions of SFAS 123(R), stock-based compensation cost is
measured at the grant date based on the value of the award and is recognized as expense over the vesting period. The fair
values of all stock options granted are estimated using a binomial model, and the fair values of all ESPP purchase rights
are estimated using the Black-Scholes-Merton option pricing model. Both the binomial and the Black-Scholes-Merton
models require the input of highly subjective assumptions. Under SFAS 123(R), the Company is required to use
judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ
significantly from the original estimate, stock-based compensation expense and the results of operations could be
materially impacted.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) refers to revenue, expenses, gains and losses that are recorded as an element of
shareholders’ equity but are excluded from net income. The Company’s other comprehensive income (loss) is comprised
of unrealized gains and losses on foreign exchange contracts.
Foreign Exchange Contracts
Although the majority of the Company’s transactions are in U.S. dollars, some transactions are based in various
foreign currencies. The Company purchases short-term, forward exchange contracts to hedge the impact of foreign
currency fluctuations on certain underlying assets, revenue, liabilities and commitments for operating expenses and
product costs denominated in foreign currencies. The contracts have maturity dates that do not exceed 12 months. The
Company does not purchase short-term forward exchange contracts for trading purposes.
The Company applies the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”), as amended, which establishes accounting and reporting standards for derivative instruments
embedded in other contracts and for hedging activities. The Company had outstanding forward exchange contracts with
61
WESTERN DIGITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)